Headline Inflation to Dip to 14.75% in February 2018

Tuesday, March 6, 2018 / 07:34 PM / FDCWe are forecasting a sharp fall in
year-on-year headline inflation to 14.75% for February 2018, after a steep
decline from January’s inflation of 15.13%. Apart from being the 13th
consecutive monthly drop in inflation, the rate of decline has increased from
the previous month’s deceleration of 0.24%. Our forecasting methodology is
based on a simple regression model and empirical analysis, spiced with some
qualitative reasoning. We expect month-on-month inflation to increase to 1.01%
(12.82% annualized).During the month, certain price moderating factors
were noticeable. These include:

A
decline in most global commodity food prices such as sugar and rice and to
a limited extent, the stability of the exchange rate within the
N362/$-N363/$ band. Ample forex supply and exchange rate stability
continue to taper imported inflation.

Reduced
naira liquidity in the system as the average opening position of banks
dropped by 38.63% to N173.78bn long in February.

Marginal
expansion in production levels - evident in an increase in FBN PMI to 54.7
from 54.6 in Jan’18.

This
reflects a soft inventory build-up by manufacturers in February.

Improved
power supply from 3,690MW/hr in January to 3,937MW/hr.

However, there was one price
propelling factor which had a limited impact on inflation. This was the
lingering fuel scarcity in the country.

Core sub-index to
decline Core inflation (inflation less
seasonality) is expected to drop marginally to 12.06% year-on-year in February
from 12.10% in January, owing to an improvement in power supply from 3,690MW/hr
in January to 3,937MW/hr. The stability of the naira has also tapered core
inflationary pressures.Food sub-index to decline furtherWith the harvest season over and the
planting season commencing, food inflation is expected to taper to17.8%
year-on-year in February from 18.61% in January 2018. However, month-on-month,
food inflation is projected to increase to 1.02% (12.89% annualized) from 0.87%
(11% annualized), due to higher prices across the food basket, especially
grains.Sub-Saharan AfricaMost SSA countries under review
recorded a decline in headline inflation. The decline was due largely to a
slowdown in the prices of food, transport, housing and utilities. Logistics and
utility costs in these countries remain vulnerable to global oil prices. The
monetary policy stance of most African economies has been unchanged so far in
2018.

Concluding ThoughtsAlthough inflationary pressures were
subdued in the month of February, we are likely to see a reversal in the trend
in the coming months. As the first quarter ends and the Easter celebration
approaches, business activities are likely to pick up and trigger a further
build-up of inventory and inflationary pressures.The MPC is scheduled to meet in March,
assuming a quorum is formed on time. The mix of a sub-optimal growth rate of
0.8% (2017) and an anticipated decline in inflation increases the possibility of
adopting an accommodative monetary policy (lowering interest rates) at this
meeting.